Why US Airways is the only partner for American Airlines that makes sense
Ahles’ story points out the obvious speed bump for AMR’s leaders: If they merged with US Airways their executive team would likely be gutted.
Source: Fort Worth Star-Telegram
Author: Andrea Ahles
After months of going solo, American Airlines’ parent, AMR Corp., is looking for a someone to dance with.
The only problem for the Fort Worth company is that there may be only one airline available, industry analysts say.
“American is the dance partner that hasn’t found anyone to go home with yet,” said Ken Malek, managing director at Conway MacKenzie, a financial turnaround and crisis management firm. “The other attractive partners are already taken.”
Last week, CEO Tom Horton announced that AMR, which filed for bankruptcy in November, would begin considering merger scenarios in addition to its stand-alone restructuring plan.
“It is at this juncture that it now makes sense to carefully evaluate a range of strategic options, including potential mergers, which could make the new American even stronger,” Horton told employees.
In a meeting with its unsecured creditors committee, American outlined merger scenarios with US Airways, JetBlue Airways, Virgin America, Frontier Airlines and Alaska Airlines.
But analysts say only one makes sense. That’s US Airways, which has been publicly discussing a merger with AMR with the media and creditors and has gained the support of American’s three largest unions.
“Neither of those airlines need to merge to survive,” said aviation consultant Mike Boyd of Boyd Group International. “American doesn’t need to merge, but a merger with US Airways would make it stronger.”
Here’s a rundown on the candidates.
What it brings to a merger: US Airways has a strong presence on the East Coast, particularly with its shuttles between Boston, New York and Washington, D.C. It would also add market share in Los Angeles. With only 20 overlapping routes and the support of American’s unions, a US Airways-AMR merger would likely be approved by government regulators.
Company comment: US Airways CEO Doug Parker has been publicly campaigning for a merger, and last week the airline announced that it had bought a small amount of AMR’s debt so it could participate in the bankruptcy proceedings.
“[The merger] would create an airline that is stronger than American is today, that flies to more places, and allows the customers of American to fly to more markets than they can today,” Parker said last month.
Analysts’ outlook: Wall Street started talking up this merger scenario the day that AMR filed for bankruptcy in November. When American’s unions announced in April that they would support a merger, analysts said the likelihood of a deal skyrocketed.
“If [AMR executives] don’t do something, they lose control of the process because the unions are really lining up behind a USAir deal, and USAir has promised them less of the pain in the restructuring if a merger is the exit strategy,” Malek said.
Until last week, American had said it planned to restructure and emerge from bankruptcy as a stand-alone airline. Maxim Group analyst Ray Neidl said that if American remains independent it would still need to beef up its presence on the coasts, which a US Airways merger would accomplish.
“However, if there were to be a merger between these two companies, we believe that US Airways management would be the survivors, and we are not sure if AMR management is ready to accept that structure,” Neidl wrote in a research note last week.
What it brings to a merge r: Because of JetBlue’s hub at New York’s JFK Airport, a merger would instantly boost American’s market share in the most important business travel market in the country. American already has a code-sharing agreement with JetBlue that American has wanted to expand.
Company comment: “We do not comment on rumors or speculation. JetBlue’s plan is focused on growing organically,” spokeswoman Allison Steinberg said.
Analysts’ outlook: While adding JetBlue would improve American’s New York presence, analysts believe that integrating would cause significant problems.
“If JetBlue refuses to code-share with AMR, the process of further market integration is hindered, hence the talk of a merger,” Neidl said. “Merging AMR and JetBlue in our opinion would be a disaster since the models, especially how flight crews are compensated, are so different.”
A merger could also run into opposition from government regulators because a combined American-JetBlue would have 40 percent of the market share at JFK, Wolfe Trahan’s Hunter Keay said.
“Our sense is regulators would also be uneasy about a merger with JetBlue, as that would mean one less low-cost carrier operating in the U.S., and New York City specifically,” Keay wrote in a research note Friday.
What it brings to a merger: Alaska has significant market share on the West Coast, particularly in Los Angeles and with routes to Mexico. American has a code-sharing agreement with Alaska that it expanded after Oneworld alliance partner Mexicana Airlines folded.
Company comment: Spokeswoman Marianne Lindsey said Alaska Airlines does not comment on specific merger or acquisition proposals.
“We have said for many years that our preference is to remain a strong, vibrant, independent company,” Lindsey said. “We think our current plan provides the best outcome for all of our stakeholders — including employees, customers and shareholders.”
Analysts’ outlook: Alaska’s Los Angeles hub would help American’s cornerstone strategy. However, since the airline usually posts solid investor returns, it may be too pricey for American. Nor would an Alaska merger address American’s market share on the East Coast.
“Alaska has a niche product that has high-value routes up and down the West Coast, and I don’t see a lot of traffic from that north-south flow on the West Coast being a fix to American Airlines’ revenue issues,” Malek said.
What it brings to a merger: Unlike the other possible partners, Frontier is actually for sale. The airline, which was bought by Republic Airways when Frontier was in bankruptcy in 2009, has a hub in Denver that competes with United and Southwest airlines for market share.
Company comment: “We don’t respond to or comment on rumors or speculation,” spokesman Peter Kowalchuk said. “However, Republic announced last November its intent to separate its Frontier and Republic businesses and is working with Barclays Capital to identify potential transaction opportunities.”
Analysts’ outlook: Republic has more incentive to sell Frontier to American than American has the need to buy it, Keay said. “We don’t see much benefit for AMR in acquiring Frontier,” he wrote. “Frontier’s financial results have been subpar, and their network doesn’t enhance AMR’s cornerstone strategy.”
What it brings to a merger: Since its inception in 2007, Virgin America has targeted the premium business passenger who likes to fly coast to coast in luxury without paying a steep price. The airline would provide double-digit increases in market share in Los Angeles and New York.
Company comment: It declined to comment. It has indicated it plans to stay independent.
Analysts’ outlook: While Virgin would help American’s cornerstone strategy, it has yet to make a profit. It reported a $76 million loss in the first quarter this year.
“Virgin is a great, high-quality airline, but they’re losing their shirt,” Boyd said.
“And it only brings San Francisco to the table, which is dominated by United.”
Andrea Ahles, 817-390-7631. Twitter: @Sky_Talk